Final answer:
Crown Jet, who entered into a short forward contract with Murray Electric, pays Murray Electric $48,000 because the spot rate on expiry was lower than the forward rate they locked in, and the forward contract was cash settled for the difference.
Step-by-step explanation:
The student's question involves a situation where two companies, Murray Electric and Crown Jet, have entered into a forward contract to hedge against the risk of fluctuating exchange rates between the dollar and the euro. Murray Electric agreed to buy precision lathes from Germany for €800,000, and CrownJet agreed to sell a jet to a soccer team in France for the same amount, with both transactions set to occur in 6 months.
They used a forward contract to lock in an exchange rate of $1.12/€, but on the expiry date, the spot exchange rate is $1.06/€. Murray Electric went long, and Crown Jet went short on the forward contract, which means Murray Electric agreed to buy euros at the forward rate, and Crown Jet agreed to sell euros at the forward rate. Since the contract iscash-settledd, we calculate the difference between the forward rate and the spot rate, which is $1.12 - $1.06 = $0.06 per euro. The total difference is $0.06/€ x 800,000€ = $48,000. Since the spot rate on expiry ($1.06/€) is less than the forward rate ($1.12/€), Murray Electric would gain from this difference. Therefore, CrownJet, who went short, pays Murray Electric $48,000 upon contract settlement.